ADC profit falls, cuts forecast again

Shares tumble following third-quarter report

WASHINGTON (MarketWatch) -- Shares of ADC Telecom dropped more than 8% Wednesday after the maker of networking equipment posted a lower third-quarter profit and trimmed its 2006 sales forecast for the second time in two months.

ADC, which canceled its planned acquisition of Andrew Corp. earlier this month, cited temporary spending delays by two large customers, believed to be BellSouth Corp.
BLS, +0.00%
and Verizon Communications
VZ, +1.24%

In the fiscal quarter ended July 28, meanwhile, ADC
ADCT
said net income fell to $11.3 million or 10 cents a share, from $23.9 million, or 20 cents a share, a year earlier.

Revenue for ADC rose 12% to $344 million from $307 million a year ago, although sales were down 4% from the prior quarter.

Excluding onetime costs and discontinued operations, ADC said it would have earned $36.5 million, or 30 cents a share, compared with $40.6 million, or 33 cents a share, a year ago.

On that basis, ADC was expected to earn 26 cents a share on sales of $332 million, according to the consensus of analysts surveyed by Thomson First Call.

Looking ahead, the company estimated annual sales would range from $1.27 billion to $1.285 billion, with adjusted earnings per share of 88 cents to 93 cents from continuing operations. Just last month, ADC was forecasting annual revenue of $1.28 billion to $1.3 billion, well below its original forecast.

On Tuesday, shares of Eden Prairie, Minn.-based ADC rose 42 cents, or nearly 3%, to $14.75 ahead of the earnings report, which was issued after U.S. markets closed. The stock fell in after-hours trading, however.

Customer holdups

Investors weren't expecting big surprises in the third quarter since ADC warned in mid-July that it would not meet its original sales forecast for 2006. Yet Wall Street analysts wondered whether the aborted purchase of Andrew Corp. partly contributed to the poorer performance. Some suggest that executives may have been distracted during the quarter.

Yet the primary culprits in the company's slowing momentum are likely BellSouth and Verizon, two of ADC's largest customers. BellSouth has delayed build out of a fiber-based network amid its pending sale to AT&T Inc. announced earlier this year, while Verizon cut back on orders after an inventory glut, analysts say.

ADC is a key supplier for both companies in their efforts to create super fast networks capable of delivering pay-television and blazing Internet service. Verizon is much further along in its multibillion dollar plan. BellSouth has proceeded more cautiously.

By early next year, however, analysts expect Verizon and a combined AT&T-BellSouth to accelerate fiber-related purchases, a trend that would speed up ADC's growth and give a lift to its flagging stock. ADC shares fell sharply after the company first announced the Andrew purchase in late May, and the stock suffered another setback when ADC issued a sales warning near the end of July.

More deals?

Indeed, many investors resisted the Andrew deal right from the very start and urged the company to cancel the acquisition. They said ADC overpaid for a company with limited growth potential.

ADC mainly sought to acquire Andrew to strengthen its wireless-networking business, but the company would have benefited mostly by cost reductions and greater economies of scale -- assuming merger integration went as planned. In the long run, investors believe the deal would have been a drag on ADC's growth.

ADC management was given an easy way out after CommScope Inc. earlier this month offered to buy Andrew. for $1.7 billion in cash and assumed debt. The bid trumped ADC's all-stock proposal, whose value had plunged from $2 billion when the deal was first announced to just $1.3 billion at the time of CommScope's offer.

ADC and Andrew terminated their agreement and Andrew later rejected the CommScope bid as too low. For now, Andrew plans to remain independent.

Yet ADC Chief Executive Robert Switz said in a conference call after the earnings report that the company expects to make more acquisitions in the future in order to broaden its product portfolio.

"We are still committed to gaining scale," said Switz, adding that ADC has to bulk up to serve the needs of its biggest customers.

In the past few years, big phone companies have gotten bigger in an effort to become all-in-one providers of communications services -- local, long distance, wireless, high-speed Internet and pay television. In turn, they've put pressure on suppliers to consolidate and offer a wider range of products.

The spate of industry acquisitions, however, is expected to continue to make it difficult for ADC to offer reliable forecasts, executives said.

"Given the current environment in which our larger wireline and wireless customers are consolidating and integrating operations, these short-term variations can be difficult to plan for and we do not believe they are reflective of the long term prospects for our business," Switz said.

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